Final answer:
After a year, Zeina's short sale of 500 shares of Eastern Tobacco resulted in a remaining margin of EGP 2,375 in her account and a rate of return of approximately 33.93%, once the drop in share price, dividends received, and broker commissions were accounted for.
Step-by-step explanation:
Due to COVID-19, Zeina engaged in a short-selling transaction by borrowing 500 shares of Eastern Tobacco (EAST) to sell them with the expectation of buying them back at a lower price. The initial share price was EGP 20, and the price after a year dropped to EGP 15 per share. In this case, Zeina's initial investment (the proceeds from the short sale) can be calculated as follows:
The proceeds from the initial short sale: 500 shares × EGP 20 = EGP 10,000
The initial margin requirement is 70%, meaning Zeina needed to have EGP 7,000 (70% of EGP 10,000) in her account.
When the price of EAST dropped to EGP 15, Zeina could buy back the 500 shares for a price of 500 shares × EGP 15 = EGP 7,500.
Zeina also received a dividend payout of 500 shares × EGP 0.25 = EGP 125. However, to execute the transactions, Zeina had to pay her broker a commission of EGP 0.5 per share, which amounts to 500 shares × EGP 0.5 = EGP 250 for both the sell and buy transactions.
Now, Zeina's account after buying back the shares would be: Proceeds from the short sale - Costs of buying back the shares - Total commissions + Dividends = EGP 10,000 - EGP 7,500 - EGP 250 (for both transactions) + EGP 125 = EGP 2,375.
This EGP 2,375 represents the remaining margin (equity) in Zeina's account.
To calculate Zeina's rate of return on the investment, we compare the net gain of the transaction (EGP 2,375) with the initial margin requirement (the initial investment, which is EGP 7,000).
Rate of return = (Net gain / Initial investment) × 100 = (EGP 2,375 / EGP 7,000) × 100 = approximately 33.93%.